Accumulated Deficit

In This Article

• What is the definition of an “accumulated deficit”?
• Is accumulated deficit the same as retained earnings?
• What does an accumulated deficit imply about a company’s profitability?
• What causes a company’s retained earnings to become negative?

Accumulated Deficit Formula

An accumulated deficit occurs when a company has incurred more losses than profits since inception.

On the balance sheet, a company’s retained earnings line item — the cumulative earnings carried over and not distributed to shareholders as dividends — serves virtually the same purpose as the accumulated deficit.

Hence, the term “accumulated deficit” can be used interchangeably with “retained loss.”

But for purposes of financial reporting, companies with a negative retained earnings balance will often opt to report it as an accumulated deficit.

Accumulated Deficit

The formula for retained earnings equals the prior year’s retained earnings plus the current period net income, less any dividends paid out to shareholders.

Accumulated Deficit Formula

• Retained Earnings / (Accumulated Deficit) = Prior Balance + Net Income – Dividends

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Accumulated Deficit Example Calculation

In a financially stable company, if a company with a retained earnings balance of $10 million just generated $6 million in net income and paid $2 million in dividends, the retained earnings for the current period is $14 million.

• Retained Earnings = $10 million + $6 million – $2 million = $14 million

Conversely, suppose a different company with a retained earnings balance of $2 million just incurred a loss of $4 million in net income and paid no dividends.

In that case, the accumulated deficit for the current period is negative $2 million.

• Accumulated Deficit = $2 million – $4 million = – $2 million

Causes of Negative Retained Earnings

If a company’s retained earnings balance becomes negative, that could often be a cause for concern.

But negative retained earnings should be interpreted as a bad sign only if the cause is mounting accounting losses.

In the worst-case scenario, the company has frequently sustained significant losses (i.e. negative net income), resulting in a negative retained earnings balance.

But one consideration is where the company is currently at in its lifecycle.

For instance, growth-oriented startups and early-stage companies reinvesting heavily into themselves to support future growth and scale will incur substantial capital expenditure (CapEx), sales & marketing expenses, and research and development (R&D) expenses.

Other exceptions where negative retained earnings are not necessarily a negative sign include the payout of dividends, which contributes to lower (or even negative) retained earnings.

In the case of dividends, the cause of the negative retained earnings is actually beneficial to shareholders since more capital is distributed to shareholders (i.e. direct cash payments are received).

Tesla Accumulated Deficit Example

In Tesla’s 2021 10-K, we can see how their balance sheet’s retained earnings line is stated as “Retained earnings (accumulated deficit)”.

^{Tesla Balance Sheet (Source: TSLA 10-K)}

When Tesla’s retained earnings balance was negative in FY-20, it was reported as an accumulated deficit.